China's green-trading rise puts world on notice

Cross-border market links may leave Japanese manufacturers out of the loop

KEISUKE KUBOTA, Nikkei senior staff writer

TOKYO -- China is fast emerging as a major force in emissions trading, and experts say that may work against Japanese companies.

Now that the Paris Agreement -- a United Nations-backed accord aimed at reducing greenhouse gases -- has gone into effect, governments are expected to ramp up their efforts this year to curb emissions.

Attracting considerable attention among the governments involved is China's plan to introduce a unified nationwide emissions trading system as early as this coming summer. Beijing wants to expand systems that are already in place in selected locations, as well as link those efforts with moves in Europe and other Asian countries.

The new system appears likely to impact the business strategies of Japanese companies operating in China, as well as Japan's plans to introduce its own emissions trading system.

Cap and trade

In 2013 to 2014, China introduced pilot emissions trading programs in seven cities and provinces, including Shanghai, Beijing, Tianjin and Guangdong Province. The program places caps on carbon-dioxide emissions by a total of over 2,000 companies that each produce annual CO2 emissions of between 10,000 and 20,000 tons. These companies try to stay within the permitted emissions threshold by buying and selling their emissions credits.

Credits covering over 80 million tons of emissions are traded under those programs. Most of the companies involved achieve their targets, though it is not known how the companies in the trading system for Chongqing are faring, as the market has not disclosed its results.

The credits trade at an average of 30 yuan ($4.33) per ton.

Jin Zhen, an expert on China's environment policy at the Japan Science and Technology Agency (JST), said he would give China's trading system efforts a score of 70 out of 100.

Jin, a fellow at the agency's China Research and Communication Center, lauds the programs for introducing mechanisms to curb price volatility, including a rule enabling companies to carry over their credits to the following year.

The planned nationwide system will be introduced in phases, starting with eight industries -- including petrochemical, steel and power -- and eventually cover a total of 7,000 to 8000 companies.

New exchanges are planned for Fujian and Sichuan provinces, to bring the total to nine.

Under the Paris Agreement, China has pledged to reduce its CO2 emissions, as measured in emissions per unit of gross domestic product, by 60% to 65% of the 2005 level by 2030.

By expanding emissions trading, the country expects to reduce overall emissions by about 300 million tons annually.

Experts, citing the sheer volume of the Chinese market, say these moves will impact carbon pricing in other countries. The system envisaged by Beijing would cover some 3 billion to 5 billion tons of CO2, or about half the country's total emissions. That would exceed the roughly 2 billion tons of emissions credits traded under the European Union's system, which started in 2005, making China's the world's largest market.

Diplomatic tool

There are other global ramifications: China wants to link its market with those in Europe and elsewhere in Asia.

South Korea introduced an emissions trading system in 2015, while Taiwan and Thailand have plans in the works.

Many experts say Beijing will use emissions trading as a diplomatic tool, especially in connection with its Belt and Road Initiative to provide overseas infrastructure assistance and the China-led Asian Infrastructure Investment Bank.

They say China may offer financial or technological assistance for resource- and infrastructure-development projects to obtain and sell emissions credits gained through these projects.

The JST's Jin said China may also attempt to get the jump on other nations in establishing standards for green technologies.

Kentaro Takahashi, senior policy researcher at Japan's Institute for Global Environmental Strategies, warned that Japanese companies with manufacturing operations in China may find themselves at a disadvantage if the Chinese system is linked to those in Europe and South Korea. Should those links happen, companies in those markets that obtain credits by reducing CO2 emissions in China would have the option of using them to offset excess emissions in their home countries by having the domestic operations purchase the credits. They would also have the option of selling credits in China.

As Japan does not yet have a full-blown trading system, Japanese companies operating in China would not have those options, Takahashi said.

Japan's Environment Ministry plans to start discussions on creating a national emissions trading system starting in fiscal 2017, which runs through March 2018. It expects to decide on whether to move ahead with the project at some point between fiscal 2019 and 2021.

A ministry official said it is "well aware of the importance of having a trading system," but that "in Japan, opposition from the business circles is strong, and it's not easy to convince them."

With the world's biggest emitter of greenhouse gases poised to drastically change the face of emissions trading, Japan urgently needs to reconsider its timetable for discussing a new trading system.